Refinance and allocating costs to home basis


P

Peter Kronenberg

I just re-financed my mortgage. Despite Quicken's poor documentation
on the subject, I have successfully entered the refi in Quicken,
paying off my old loan and leaving the new loan in place. All closing
costs were allocated from a 'settlement' account, an idea I got
reading old messages here.
My question is about items that go to increase your home's basis, such
as all the closing costs (title insurance, recording fees, etc). Do I
allocate these items to the 'Home' asset, thereby increasing its
value? It doesn't really increase the value of the home. Just its
basis.
How do I tell the difference between transactions that increase a
home's basis and transactions which I enter once in a while to
increase its value?
 
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R

Rick Hess

Peter Kronenberg said:
I just re-financed my mortgage. Despite Quicken's poor documentation
on the subject, I have successfully entered the refi in Quicken,
paying off my old loan and leaving the new loan in place. All closing
costs were allocated from a 'settlement' account, an idea I got
reading old messages here.
My question is about items that go to increase your home's basis, such
as all the closing costs (title insurance, recording fees, etc). Do I
allocate these items to the 'Home' asset, thereby increasing its value?
No.


It doesn't really increase the value of the home. Just its
basis.
Correct. IMO, this data is best left to your tax prep software (or tax
preparer), as it may be handled differently under different tax strategies.
Some in this NG keep track of basis within Quicken. But I think Q is rather
clumsy at tracking it, especially if you're depreciating the basis, as you
would with a home office or rental or business property. Not all
depreciable expenses are depreciated the same.

How do I tell the difference between transactions that increase a
home's basis and transactions which I enter once in a while to
increase its value?
I have categories set up for items that affect basis. Your categories can
be as simple or complex as you need. If you have no home office or business
property to track (that is, if you're not depreciating these expenses) then
KISS is best. For example, if you replace the roof you could categorize
that as a "Home Improvements" category.

Your asset account reflects your home's market value -- what it's worth if
it was appraised. The market value may or may not be affected by any
improvements that you do to the property. The market value can go up or
down depending on the real estate trends in your area. Just because you add
a swimming pool doesn't mean the home's market value is higher than it was
last year. If all the businesses in your area dry up, your market value
will probably go down. If you add a second story to your home and it gives
you a perfect view of the new interstate they built across the street that
same month, guess what?

Therefore, you want to make periodic adjustments to your asset account -- up
or down, as required. I adjust mine quarterly, but annually may suffice for
most.

In summary, place your expenses that you think affect your home's value in a
category. If you think it affected the market value, then make an
appropriate adjustment. The adjustment is not necessarily the same amount
as the expense. If you spent $20K on a tennis court somewhere where tennis
isn't popular, your market value might increase, say, $5K, $10K, not at all?
Or if you're in an area where tennis is REALLY popular, maybe the market
value went up $50K.

If you spent $20K on a fantastic new landscaping plan with bushes that spell
out nasty words in your front lawn then you might bump down the market value
a bit.

Others in this NG will strongly disagree with this advise and tell you that
your market value is directly affected to the dollar by how much your
expense was. It just doesn't work that way.


Rick Hess
New Orleans
 
R

R. C. White

Hi, Peter.

I agree with Rick's post.

To add one little tidbit: How about financing costs on your original
mortgage? If you added the costs of the loan itself (as opposed to fees for
recording the deed, and other costs that you would have incurred even if you
had paid cash for the house) to your home basis, you should go back and
recalculate. Some of the costs of the original mortgage should have been
amortized over the years you were paying on the loan; any remaining
unamortized balance should be deductible now, since you refinanced this
year.

I'll let Rick fill in the details, because they may have changed in the
decade since I retired.

RC
 
D

Dick Weaver

Peter said:
[snip]...
How do I tell the difference between transactions that increase a
home's basis and transactions which I enter once in a while to
increase its value?
"that increase a home's basis"? Basis can be increased OR decreased.

There are two requirements for a transaction to increase a home's basis
1. the nature of the transaction
2. that the effect of the transaction still be present when the home
is sold

So you do not track increases to basis but rather the current basis -
which can increase or decrease. For example, put in some wall-to-wall
carpet and you might enter

basis +1000

Ten years later spouse is tired of that carpet and you get a bargain
replacement for only 700 and make the following entries

basis -1000
basis + 700

Your basis has decreased $300.

dick w
 
P

Peter Kronenberg

Correct. IMO, this data is best left to your tax prep software (or tax
preparer), as it may be handled differently under different tax strategies.
Some in this NG keep track of basis within Quicken. But I think Q is rather
clumsy at tracking it, especially if you're depreciating the basis, as you
would with a home office or rental or business property. Not all
depreciable expenses are depreciated the same.



I have categories set up for items that affect basis. Your categories can
be as simple or complex as you need. If you have no home office or business
property to track (that is, if you're not depreciating these expenses) then
KISS is best. For example, if you replace the roof you could categorize
that as a "Home Improvements" category.
Thanks. Everything you said makes perfect sense and was pretty much
the way I was doing it before I read some old messages on this NG
about re-financing. I thought one of them talked about allocated
closing costs to the Home Asset, but it didn't seem to make much sense
to me.
 
P

Peter Kronenberg

R. C. White said:
Hi, Peter.

I agree with Rick's post.

To add one little tidbit: How about financing costs on your original
mortgage? If you added the costs of the loan itself (as opposed to fees for
recording the deed, and other costs that you would have incurred even if you
had paid cash for the house) to your home basis, you should go back and
recalculate. Some of the costs of the original mortgage should have been
amortized over the years you were paying on the loan; any remaining
unamortized balance should be deductible now, since you refinanced this
year.
Thanks. I never pay points on a re-fi, so that's not really an issue.
Of course, a lot of this is not much of an issue with current tax law,
since as long as my home doesn't appreicate more than $500,000, I
don't have to prove anything.
 
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P

Peter Kronenberg

So you do not track increases to basis but rather the current basis -
which can increase or decrease. For example, put in some wall-to-wall
carpet and you might enter

basis +1000

Ten years later spouse is tired of that carpet and you get a bargain
replacement for only 700 and make the following entries

basis -1000
basis + 700

Your basis has decreased $300.

dick w
I think I have to disagree with this. In the example you give, your
basis has increased by $1700. 10 years is a reasonable lifetime for
carpeting. You've had 2 separate capital expenses.
 
D

Dick Weaver

Well, we can all do taxes our own way, but if you want to do them the
IRS way ..... see IRS Pub 523 "Selling Your Home", "Adjusted Basis",
"Improvements no longer part of home":

"Your home's adjusted basis does not include the cost of any
improvements that are no longer part of the home" The quoted text is
followed by an example of replacing carpeting (my using carpeting as an
example was not an accidental choice!).

I've not seen the current year Pub 523 (and my copy is several years
old), but I'm not aware of any change.

dick w
 
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R

Rick Hess

Mike Blake-Knox said:
How do you get an updated home value quarterly? A realtor always seems to do a
fair amount of work to calculate a house's market value and the comparative
value portion is subjective.
It's a best guess, based on real estate trends, some reported in the local
papers, i.e. "Property values in New Orleans/Vieux Carre were up 5% last
quarter".

Most of my businesses are in real estate, so I'm probably more immersed in
property values than people in other professions. As I said, an annual
adjustment is probably sufficient for most.

People disagree with me all the time, but I insist that the only way to know
what a property is worth is to see how much it sells for. It's only worth
what the market will bear at the time it sells. Any other values placed on
a property are only guesses. The trick is to guess prudently.

BTW, there's not that much work involved with a Realtor's cursory evaluation
of residential market value (I'm sure I'm going to get hate mail from
Realtors now) unless they need to put it into a formal format. At least
half the effort is in finding good comparable "solds". I know of no
Realtors who won't pull this information up for you for free (they want your
future business), but it's also available from public records, including the
published transfers in newspapers of every US city where I've looked. The
Realtors' MLS reports are by far the easiest to evaluate since a glance will
show all the info you need: living area, bedrooms, bathrooms, parking, lot
size, etc, plus a brief description ("all plumbing fixtures are
gold-plated", "Nice view of toxic waste facility", etc.). If you want to
know how much a home is worth, you pull up the solds in the area and compare
the particulars to make adjustments to the subject home's value. You can
guess (there's that word again!) how much a 2-car garage is worth on your
house when comparing it to a sold with a 1-car carport, and then add, say,
$15K to the value. Remember, it's not worth what it cost to build; it's
worth what it adds to the value. Once I have the solds it takes me about 10
minutes to decide how much to offer for a property or how much to sell one
for. But I do this several times a week.

I am in no way saying that more formal evaluations of property value
(appraisals, BPOs) are this easy. The more detailed reports might evaluate
the worth of that garage by the extent that people own their own vehicles in
the area.

My point is that property values are dynamic, depending on real estate
trends and the improvements (or anti-improvements) that are imposed on the
property. Most Q users should have a good guess at how much their property
is worth. How often and how prudently they guess is driven by their
individual requirements.


Rick Hess
New Orleans
 

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